The U.S. stock markets rebounded from a dismal 2022 in the first quarter led by the Nasdaq soaring 16.8%. The S&P 500 and the Dow Jones significantly lagged the Nasdaq, but still posted gains of 7.0% and 0.4% respectively for the quarter.
The stock market’s first quarter performance was a bit unexpected given the Federal Reserve’s continued fight against inflation and increases in the federal funds interest rate. Despite these rate increases, the bond market rallied during the quarter to push government yields lower and help the Bloomberg U.S. Aggregate Bond Index post a 2.5% gain.
A bounce was to be expected after both the stock and bond markets had a tough 2022, with both falling double digits. Investors were looking forward to a pause in interest rate hikes by the Fed and a slowing in the rate of inflation. Banking troubles, big layoffs in big tech, and a pullback in consumer spending forecasts choppy economic waters in the quarters to come.
The S&P 500 is a weighted index, which means the biggest companies have an outsized impact on their performance. In fact, the ten biggest companies in the index represent 29.5% of its market capitalization and accounted for 90% of the gains during the first quarter. After the shellacking the index took in 2022, passive stock investors transitioned to equal weighted stock index ETFs in 2023. While this transition may have been ill-timed given the equal weighted index which fell 4.3% during the quarter, an equal weighted index is arguably a better benchmark for how the 500 largest publicly traded companies performed during a given time period. Looking back at 2022, when the weighted S&P 500 fell 18.11%, the equal weighted S&P 500 Index fell only 2.5%, representing a 20.61% difference in performance. Given these massive performance gaps, we believe using both performance benchmarks provide a better gauge for investors to measure the Fund’s performance.
Despite a doubling in the 30-year mortgage rate over the past year, residential real estate continues to show impressive resiliency due to tight supply and sustained demand. While hot markets like Phoenix, Las Vegas, Austin and Boise, Idaho posted declines in average home prices, most markets in the Northeast, South and Midwest showed solid gains. This price stability is driven by existing homeowners’ unwillingness to exchange low mortgages on current homes for today’s higher rates on new homes.